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Latest research from GreySpark looks at the regulatory and structural changes that are impacting the global FX market, and draws some interesting conclusions.

The report Trends in FX Trading 2013 (which I haven’t seen, other than in abstract here) looks at the evolution of market structure and reasons behind the decline in dominance of the wholesale dealer-dealer platforms (D2D), and the rise in importance of the dealer-client (D2C) platforms, both Single-Dealer Platforms (SDP) and Multi-Dealer Platforms (MDP).

From what I can see, the paper draws the conclusion that these trends will lead to the development of an equity style All-to-All (A2A) market structure, presumably characterised by central limit order books (CLOBs). Possibly driven by regulation and capital efficiency needs, making it less attractive for banks to market make, although not sure that should follow?

As the abstract from the report states:

..In the next three years, GreySpark’s research anticipates that the lines will become blurred between the characteristics of FX D2D and D2C venues, and an all-to-all (A2A) market for FX liquidity will arise. The emergence of A2A venues will continue from 2017 onward as the blurring of the divide between the characteristics of D2D and D2C FX trading venues continues.

As I say, I haven’t seen the report, or the research that GreySpark have used for this analysis. I will leave till another time the central theme about whether and how the FX market structure might change based on regulatory and capital drivers, and how bank’s can best defend their client ‘centric’ franchise.

But for now, I want to focus on the Central Bank FX survey data that is publicly available, and see to what extent the trends in the reported data supports GreySpark research.

The reported FX volumes from the Bank of International Settlements (BIS) Triennial FX Survey certainly appears to support the decline in the Dealer-Dealer share of overall FX volumes as shown in the table below.

Bank of International Settlements (BIS) data

However, when looking at London, which is the largest FX centre, the Bank of England FX survey data doesn’t show the same trend as the BIS data. The Bank of England Semi annual FX survey chart is shown below, clearly shows a stable Deal-Dealer share of FX. Although this is for all FX products, and certainly there are differences when looking at Spot vs Swaps etc.

Bank of England FX Survey data (by User Segment)

Finally, when we look at same Bank of England FX Survey data, but by execution method (and group methods together to create a D2D and D2C category), rather than by client segment, we get the following mixed picture of the trends.

Bank of England FX Survey data (by Execution method)

Interestingly, central bank’s and BIS Triennial FX Survey’s will be changing their survey’s from 2013 onwards to better reflect changes in market dynamics by creating better distinctions between flows that have been inter-mediated. The changes are shown here: